Dearness Allowance (DA)

India has continuously been experimenting with various measures to curb the effects of rising inflation in the country. Food is the commodity that gets hit the most, and this often has a direct impact on the economy itself. Therefore, Dearness Allowance/ DA comes in to play a vital role in protecting the everyday lives of citizens from the adverse effects of the rising prices. Earlier, Dearness Allowance was offered by the Government of India to its employees when demands for wage revision was raised. However, over time, it was linked to the Consumer Price Index. This article talks about Dearness Allowance (DA) and everything in concern with the same.

What is Dearness Allowance?

The salaries received by employees in the Public Sector is divided into various components. One of these components is the Dearness Allowance. The Government pays DA to its employees in order to offset the impact of inflation. This would include pensioners as well. Constant enhancement is essential for the effective salaries of Government employees in order to help them to keep up with the rising prices. Despite the constant measures by the Government to control the rate and effects of inflation, only partial success was achievable as the prices often vary as per the market. Therefore, the Government finds it essential to protect its employees from the effects of inflation. The impact of inflation varies according to location. Similarly, Dearness Allowance is calculated according to the location of the employee. The allowance varies from one employee to another as it depends on if their living is based off in the Urban, Semi-Urban or Rural Sectors.

Calculation

Dearness Allowance is provided to employees in order to protect them against the rise in prices in a financial year. Since 1996, Dearness Allowance has been included to compensate for the increase in costs/ inflation in a particular financial year. Every year, it is calculated twice, once in January and then, in July. The current calculation of Dearness Allowance is executed using the formula that the Government established in the year of 2006. Dearness Allowance is calculated accordingly:

Calculation for employees of the Central Public Sector

Percentage of Dearness Allowance = {(Average of the All-India Consumer Price Index (Base year is kept at 2001; where CPI is 100) for the last 12 months -115.76)/115.76} x 100

For the employees of the Central Government

Percentage of Dearness Allowance= {(Average of the All-India Consumer Price Index (Base year is kept at 2001; where CPI is 100) for the last 3 months -126.33)/126.33} x 100

Income Tax & Exemption Limits

According to the last updates since the Assessment Year 2017-18, Dearness Allowance is completely taxable for individuals who are salaried employees. In case an employee is provided with a rent-free unfurnished accommodation, Dearness Allowance is a part of the salary to the extent that it forms a part of the employee's retirement benefit salary under the condition that other pre-requisites are met. It should be noted that the Income Tax Act mandates that tax liability for Dearness Allowance is required to be declared while filing returns.

DA for Pensioners

Every time a new pay structure is rolled out by a salary commission, the pension for retired public sector employees is revised too. Same goes for Dearness Allowance. Every time the Dearness Allowance is increased by a certain percentage, the same change is also reflected in the pensions received by the retired public sector employees. This applies to both regular pension and family pension as well.

Types of DA

For appropriate calculation, Dearness Allowance has been categorised into two.

Industrial Dearness Allowance
Variable Dearness Allowance

Industrial Dearness Allowance

Industrial Dearness Allowance, or commonly known as IDA, is the allowance that applies to the Public Sector Employees of the Central Government. Recently, the Indian Government has increased the rate of IDA by 5% for this sector. This has been set to benefit all the board level executives, officers and employees of the Central Public Sector Undertakings. The Industrial DA for the public sector employees undergoes a quarterly revision as per the Consumer Price Index in order to help offset the impact of inflation.

Variable Dearness Allowance

Variable Dearness Allowance, or commonly known as VAD, is the allowance that comes as a result of revision that is conducted every six months for the employees of the Central Government. VAD can be termed as the new figure obtained after considering the Consumer Price Index. Depending on the obtained values, the DA of employees is revised and executed. Variable Dearness Allowance in itself is dependant on three essential components. They are as follows:

Base Index: This remains fixed for a particular period.
Consumer Price Index: The CPI impacts the allowance as it changes monthly.
Variable Dearness Allowance that has been fixed by the Government: This remains fixed unless the Central Government decides to revise the basic minimum wages.

Dearness Allowance vs House Rent Allowance

Dearness Allowance is estimated as a particular percentage of an employee's basic salary. This is then added to the basic salary along with various other components such as House Rent Allowance/ HRA to make up the total salary of a Government Sector employee.

House Rent Allowance/ HRA is the salary component provided to an employee by their employer to meet the expenses with respect to the accommodation. This allowance applies to both the employees of the Private Sector and the Public Sector as well. On the other hand, DA applies primarily to Government employees or the employees working in the Public Sector.

Pay Commission

The Pay Commission evaluates and changes the salaries of public sector employees according to the various components that form the final salary of an employee. Therefore, DA is considered by the Pay Commissions while preparing subsequent pay commission reports as well. The responsibility of taking into account of any factor that influences the calculation of salaries is vested with the Pay Commission. One of the duties of the Pay Commission would also include the periodic reviewing and updation of numerous factors for the calculation of Dearness Allowance.

Merger of Dearness Allowance

Since the revision of the calculation formula for DA, the allowance has been on a constant rise for Public Sector and Central Government employees. Currently, it stands at a rate of 50% of an employee's basic salary. This is due to the constant enhancement in the allowance annually in order to offset the negative effects of inflation. The merger of Dearness Allowance with an employee's basic salary is recommended when the former exceeds the rate of 50%. If this is executed, this would mean a significant salary hike for the employee. This is because every other component of one's salary is calculated depending on the basic salary. The demand was raised with the Central Government, and a decision is to be expected soon. If it is in favour of the employees, it would significantly boost their incomes.